Tuesday, October 02, 2007

Look to the Lodestars

Hoping and praying for additional Fed easing moves is a lousy reason to buy the stock market.

Until this morning, the history-chasing gold rally and chronically soft dollar have been telling the Fed that its 50 basis point, shock and awe, liquidity- adding rate cut on September 18th is enough. Gold is down about $20 bucks today. Hopefully that rally is over. But it was a strong rally.

I’m not sure gold is still a great inflation predictor. But it can be a useful short-term liquidity indicator suggesting that the central bank has created more than enough new dollars -- at least for the moment. There are other explanations for the gold rally, but the threat of excess liquidity cannot be ignored.

Hopefully stronger investment and economic growth will absorb this liquidity. And I still strongly believe that growth is counter-inflationary.

I like what the Fed has done so far. The credit crunch is slowly dissolving. But a stand pat Fed strikes me as sensible right now.

The main point here is that investors looking at stocks should use the lodestars of corporate profits and long-term Treasury rates as their guides. Stick to the fundamentals, rather thank wishing and praying for additional Fed rate cuts.